I am a Tax Partner in WithumSmith+Brown’s National Tax Service Group and the founding father of the firm's Aspen, Colorado office. I am a CPA licensed in Colorado and New Jersey, and hold a Masters in Taxation from the University of Denver. My specialty is corporate and partnership taxation, with an emphasis on complex mergers and acquisitions structuring. In the past year, I co-authored CCH's "CCH Expert Treatise Library: Corporations Filing Consolidated Returns," was awarded the Tax Adviser's "Best Article Award" for a piece titled "S Corporation Shareholder Compensation: How Much is Enough?" and was named to the CPA Practice Advisor's "40 Under 40."

In my free time, I enjoy driving around in a van with my dog Maci, solving mysteries. I have been known to finish the New York Times Sunday crossword puzzle in less than 7 minutes, only to go back and do it again using only synonyms. I invented wool, but am so modest I allow sheep to take the credit. Dabbling in the culinary arts, I have won every Chili Cook-Off I ever entered, and several I haven’t. Lastly, and perhaps most notably, I once sang the national anthem at a World Series baseball game, though I was not in the vicinity of the microphone at the time.

The Fiscal Cliff for Dummies

Admit it. You’ve got no clue what the “fiscal cliff” is. You’ve heard the term repeated endlessly by talking heads on Fox News, CNN and Bloomberg, but try as you might to become enlightened, you’ve found the detail surrounding this hotly-debated cliff to be woefully lacking. And with time, you’ve only become more convinced that the “fiscal cliff” is one of those things that everyone simply pretends to understand, but nobody actually does, like poetry or hockey.

And you might be right. But that won’t stop me from trying to explain what little sense I can make of it. And as I tend to do when the topic gets tricky, I’m going with the Q&A format. Lets get started.

Q: OK, smart guy…so what is the fiscal cliff?

A: The “fiscal cliff” is a term used to describe the convergence of two events on December 31, 2012 — the expiration of almost every tax cut enacted since 2001 and a scheduled reduction in government spending — that, if the experts are to be believed, when taken together will threaten to bankrupt America, shift the world balance of power, and knock Earth off its orbit, sending it hurtling through cold, dark space.

Q: I’m confused. We clearly have a bloated deficit, so I would think that generating more tax revenue while cutting spending would be a good thing. How can more cash in and less cash out be bad?

A: Don’t ask me; I slept through both micro and macro economics in college. Luckily, it turns out you can just write “supply and demand” for every answer on the final and walk away with a C+. But according to the econ eggheads, while America will indeed enjoy a short term decrease in the deficit, the combined effect of the tax increases and reduced government spending will result in a huge fiscal contraction: a decrease in GDP, an increase in unemployment, dogs and dogs living together…mass hysteria.

Q: You know, that wasn’t a ton of help. Perhaps you’ll be of greater use if we stick to the tax side of things. So which tax provisions are set to expire?

Bush-Era Tax Cuts: this includes the return of the current 10/15/25/28/33/35% individual tax rate brackets to the pre-2001 rates of 15/28/31/36/39.6%, the return of the tax-rate on long term capital gains and qualified dividends from 15% to 20% and 39.6%, respectively, and the return of the limitation on itemized deductions and phase out of personal exemptions.

Obama-Era Tax Cuts: on January 1, 2013, several provisions that benefit the lower classes — most notably the increased child tax and earned income credits and the expanded education credits — are slated to expire.

The Estate Tax: the estate tax exemption and tax rate are currently at $5,120,000 and 35%, respectively. Come January, they will return to $1,000,000 and 55%.

Expiration of the AMT Patch: The most recent patch raised the AMT exemption for 2010 and 2011 from $45,000 to $74,450 for MFJ. In 2013, this will reset to $45,000, pulling tens of millions of taxpayers into AMT.

Temporary Payroll Tax Cut: For 2011 and 2012, the employee’s share of Social Security tax was cut from 6.2% to 4.2%. This rate cut expires at year end.

Obamacare Taxes: Starting in 2013, taxpayers earning more than $250,000 will pay an additional 0.9% tax on their wages and 3.8% on their unearned income (interest, dividends, capital gains.)

Extenders: As we discussed yesterday afternoon, there are a host of provisions set to expire at year end that regularly do so, before Congress retroactively resuscitates them. Foremost among the “extender” provisions are the R&D credit and the personal deduction for state and local income taxes.

Q: That is a lot of tax increases. Has anyone put a price tag on those provisions yet?

A: The TPC puts the total additional tax revenue for 2013 over 2012 at $536 billion, or a 21% increase.

Q: So who’s going to bear the burden of all this additional tax? Is this one of those rich-guys-benefit-while-regular-Joe’s-get-screwed deals?

A: No, the beauty of the fiscal cliff is that everyone gets screwed. In all, 90% of households would experience a tax increase, with the TPC estimating that the average American would watch their tax bill increase by $3,500 in 2013. That increase, however, varies among income levels:

For the lowest 20% of income earners, the removal of the 10% bracket and changes to the child tax and earned income credit will raise the average tax bill by $412.

For the middle 60%, the increase to the payroll tax rate and expiration of the Bush-era tax cuts will raise taxes by an average of approximately $2,125.

And for the top 20%, well, thanks to the increase to the top marginal rates, the return of the dividend rate from 15% to 39.6%, and the effects of Obamacare, they will experience an average tax increase of $14,173.

It’s most painful, however, for the top 1%, as the likes of Mark Cuban, Bill Gates, and Jared Fogle are staring at an average tax hike of $120,537.

Q: Fascinating. Which single change in the law stands to generate the largest tax increase?

A: The 2% hike in payroll taxes will generate an additional $115 billion in revenue, but the resetting of the Bush-Era tax cuts take the prize, adding $223 billion to the government coffers. Which will promptly be blown on a missile defense shield that is made of magic and held in place by pixies.

Q: OK, now on to the most important question. What is the likelihood that each of these separate categories of provisions is actually allowed to expire?

A: The TPC gauged that as well, and concluded the following likelihood of expiration, from most to least:

Payroll tax: it was never intended to go beyond 2012, and it won’t.

Obamacare provisions: fresh off a blessing by the Supreme Court, it’s here to stay unless Romney wins the election.

Bush-Era tax cuts impacting high-income taxpayers: likely to expire since President Obama could, and likely would, block any attempt to extend the cuts for the nation’s wealthy.

Obama-Era tax cuts: this could go either way.

Extenders: They’ve always been extended before, and likely will again.

Estate Tax: neither party wants to see the estate tax revert to pre-2001 levels.

Bush-Era tax cuts impacting low- and middle-income households: there has been bipartisan agreement that the rates should not increase for those earning less than $250,000.

AMT Patch: they’d be crazy not to extend it.

Q: I make a lot of money and hold a bunch of stock. Should I sell it all now?

A: Who am I, Kreskin? Look, I get your concern. The tax rate on long-term capital gains is set to increase from 15% to 23.8%, and that could sting. Investors might be tempted to sell like the closing scene in Trading Places, and it wouldn’t be unprecedented. Prior to the start date of the Tax Reform Act of 1986, investors went on a similar sell-off to enjoy the last days of a 20% rate before it increased to 28%.

But selling now means that you’re betting that you can predict who will win the election, what will happen during the subsequent lame duck session of Congress, and whether any 2013 legislation by a new or incumbent president might be made retroactive to January 1st. I certainly can’t predict those things, and any tax or investment advisor who tells you they can is lying. My advice? Don’t let tax motivations drive your investment decisions.

Q: Very insightful, as usual. You deserve an exorbitant raise and bonus.

A: Why thank you, though that’s not really a question. I’ll be sure to pass it on to my employers, however.

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As a very averagely paid American, I don’t mind paying more in taxes if it’s needed; however as you suggest, the extra money will likely be wasted away by the government. They’ll probably find another country full of Brown people to invade.

If taxes go up so be it. Republican Congresscritters decided to not do their jobs on this one. The cuts were set to expire in 2002 due to politics. The sequestration was passed due to politics. The fiscal cliff deadline is being jumped due to politics. If my family losing the tax refund we usually get means Republicans also lose their prizes, military etc, then I can stomach that. The Republicans in Congress need to learn that what is good for the goose is also good for the gander.